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Leases

IASB meeting summaries and observer notes


 IASB November 2009


 

 

Lessee accounting

The boards discussed:

  • Initial and subsequent measurement of the lessee's obligation to pay rentals and right-of-use asset
  • Leases with options.

The boards tentatively decided to specify the required accounting for a lessee's obligation to pay rentals and right-of-use asset as follows:

  • Initial measurement of the lessee's obligation to pay rentals would be at the present value of the lease payments discounted using the lessee's incremental borrowing rate. The boards noted that the interest rate implicit in the lease will often equal the incremental borrowing rate. Consequently, they tentatively decided that the interest rate implicit in the lease can be used if it can be readily determined. The staff will develop a definition of the interest rate implicit in the lease that would be consistent with a right-of-use model.
  • Subsequent measurement of the lessee's obligation to pay rentals would be at amortised cost using the effective interest method; the obligation arising in a simple lease would not be revised for any changes in the lessee's incremental borrowing rate. The boards will consider, at a future meeting, whether the incremental borrowing rate would be reassessed when there are changes in the expected lease term. Subsequent measurement of the obligation at fair value is not permitted.
  • Initial measurement of the lessee's right-of-use asset would be at cost, where cost is the present value of the lease payments plus any initial direct costs incurred by the lessee. The staff will assess whether the definition of initial direct costs is consistent between US GAAP and IFRSs.
  • Subsequent measurement of the lessee's right-of-use asset would be at amortised cost and would be described as amortisation rather than as rental expense.
  • The lessee's right-of-use asset would be considered for impairment by referring to existing applicable standards for impairment. A lessee preparing financial statements in accordance with IFRS would follow IAS 36 Impairment of Assets. A lessee applying US GAAP would follow Topic 350, Intangibles - Goodwill and Other of Accounting Standards Codification.
  • IFRS preparers would be permitted to revalue their right-of-use assets using the revaluation model in IAS 38 Intangible Assets; US GAAP preparers would not be permitted to revalue their right-of-use assets unless required to do so to recognise an impairment loss.

The boards discussed how the lessee would account for lease contracts that grant the lessee the right to extend or terminate the lease. The boards tentatively decided that:

  • Uncertainty about the lease term would be addressed through recognition - that is, one of the possible lease terms is selected and the accounting is based on that term.
  • The recognised lease term would be the longest possible lease term that is more likely than not to occur.
  • In determining the lease term, the lessee would consider all relevant factors.
  • Options to renew a lease that are priced at market value at the date of renewal would be considered when determining the lease term.
  • The lease term would be reassessed at each reporting date. Detailed examination of every lease would not be required unless there is a change in facts or circumstances that indicate that the lease term may need to be revised.
  • Any change to the obligation to pay rentals resulting from a reassessment of the lease term would be recorded as an adjustment to the right-of-use asset.

Lessor accounting

The boards discussed:

  • Initial and subsequent measurement of the lessor's receivable and performance obligation
  • Leases with options.

The boards tentatively decided to specify the required accounting for a lessor's receivable and performance obligation as follows:

  • Initial measurement of the lessor's receivable would be at the present value of the lease payments discounted using the interest rate implicit in the lease plus any initial direct costs incurred by the lessor.
  • Subsequent measurement of the lessor's receivable would be at amortised cost using the effective interest method.
  • Initial measurement of the lessor's performance obligation would be at the transaction price (ie the customer consideration, which will be measured at the present value of the lease payments discounted using the interest rate implicit in the lease).
  • Subsequent measurement of the lessor's performance obligation would reflect decreases in the obligation to permit the lessee to use the leased item over the lease term.

The boards discussed how the lessor should account for lease contracts that grant the lessee the right to extend or terminate the lease. The boards tentatively decided that:

  • The accounting by lessors for those options would be symmetrical with the accounting by lessees for those options; however, the boards noted that the objective of symmetry might not result in the same measurement of lease payments by the lessee and the lessor.
  • A lessor's receivable and performance obligation should be recognised based on the lease payments that will be received over the lease term. The recognised leased term would be the longest possible lease term that is more likely than not to occur.
  • The lease term would be reassessed at each reporting date. Detailed examination of every lease would not be required unless there is a change in facts or circumstances that would indicate that the lease term may need to be revised.
  • Any change to the lease receivable resulting from a reassessment of the lease term would be recorded as an adjustment to the performance obligation.

In December, the boards will continue discussing lessee and lessor accounting issues including how to account for leases that include contingent rental arrangements.

 

Date: 11/18/2009


Agenda Papers